By all accounts 2004 was a landmark year in the Company's history. Following the acquisition of LNM Holdings by Ispat International to form Mittal Steel Company, and the subsequent and recently completed merger with International Steel Group (ISG), the Company has emerged as the world's largest steel producer.
The result of the combined transactions marks a major step forward in the Company's stated objective of being a low-cost, high-margin, global steel producer. With the creation of one unified company, Mittal Steel has enhanced its ability to reap the full benefits of its unmatched size and scope. The sheer global diversity of the Company, we believe, has made a deep impact in industrial circles, and has created strong brand equity. Operating in 14 different countries, we have emerged as a strong force in the steel industry, creating a platform for significant value addition for our shareholding community.
The merger with ISG establishes us as not only the world's largest producer with a capacity of over 70 million tons, but also as the premier producer in North America. We are confident about the prospects for the new Mittal Steel USA. When we first looked at ISG, it was immediately clear to us that its management had done an excellent job in integrating the assets and building a competitive and high quality steel operation. It was apparent that there would be many long-term synergistic opportunities between ISG and our existing US operation, Ispat Inland, on account of the complementary product and market mix and a similar, highly productive culture. Integration of the two businesses is one of our main priorities for 2005.
Since the time of the last severe downturn, I have been talking about the urgent need for consolidation as one of the most important solutions to deal with the fluctuating fortunes of the industry. We have long believed that such moves are necessary to establish a strong industry able to be competitive through the cycles, and to serve an increasingly multinational customer base.
Determined to realise our objective, during 2004 we pursued and completed a number of strategic acquisition opportunities all of which further enhance and strengthen the geographic and product profile of the Company. The most notable of these were the acquisition of Polskie Huty Stali (now known as Mittal Steel Poland) and the acquisition of a majority holding in Iscor (now known as Mittal Steel South Africa). We intend to continue to look for further acquisition opportunities, including both upstream and downstream assets. This is of particular importance in today's environment, where input costs continue to increase. Iron ore prices have increased substantially, although Mittal Steel is partially protected from such rises on account of our proactive strategic policy of building an integrated business model.
Apart from consolidation through acquisitions, we also continue to evaluate opportunities for organic growth, both through our philosophy of Continuous Improvement and our Capital Expenditure Programme. The company-wide Improvement Programme focuses on monitoring operational performance across all aspects of our business and identifying ways in which to enhance performance and productivity leading to operational excellence. We continue to invest significantly to improve product quality and product mix. Capital expenditure is expected to double in 2005, encompassing a range of strategic improvements, which will enable us to move further up the value chain.
In today's environment, innovation and technical quality become increasingly important and engaging with our customers to provide them with the quality and standards they demand must be a priority at all times. Mittal Steel's Research and Development facilities continue to focus on leading the way in technical innovation and product development and it is gratifying to see a number of our researchers being recognised for their work in this field.
2004 is also remarkable for the exceptional results produced by the Company. Our record numbers were driven by strong global demand for steel, higher steel prices and the enhanced size of the business. Revenues increased by 132% to reach US$22.2 billion. Total shipments increased 53% to 42.1 million tons. Operating income more than tripled to US$6.1 billion representing an operating margin of 27.7%. I am sure that our shareholders will be pleased to note this exceptional performance, which was not only the product of the changed environment, but the result of the management's ability to leverage the environment for a substantial improvement in the bottom line.
There is no doubt, that as in 2003, the strong global demand for steel that we experienced in 2004 was largely driven from Asia, in particular China. Clearly China continues to be one of the main drivers of growth for the industry, but as I mentioned in my letter last year to shareholders, there is also a threat of it becoming a net exporter as it continues to expand its own capacity. This is a situation that must be monitored closely, although I do not believe this will create any distortion of the global supply/demand balance in the immediate future, as China appears to be handling its own expansion sensibly. We have also been looking at China in terms of building our own presence there, and in January we announced a joint equity partnership with the Hunan Province relating to Hunan Valin Steel Tube & Wire Company. This is a strategic agreement and should prove highly beneficial in helping us to further understand the dynamics of the Chinese steel market. The transaction is expected to close by the end of 2005 and we hope it will provide a strong foundation for further grow thin China.
Looking ahead there are many challenges for both Mittal Steel and the Steel industry in 2005. For Mittal Steel, as already stated, one major challenge is the integration of ISG and ensuring that the full benefit of synergies embedded in the process are realised. I have no doubt that the management team in Mittal Steel is well equipped to deal with this challenge suitably. We must also focus on completing the major Capital Expenditure Programme envisaged for 2005.
There is a growing recognition in the industry that the dynamics of the industry have changed dramatically. The unprecedented market conditions have led on one hand to a revival in the steel pricing environment, and on the other, to shortages and spiralling costs of essential raw materials. These fundamental changes have created a new model for business management in the industry. The challenge now is to demonstrate that the industry has reached sufficient maturity to sustain itself through the cycles. It is my belief that the consolidation process will continue to take place in the industry giving it the much-needed impetus to respond to the challenge posed by the environment.
In this new era, Mittal Steel is at the forefront in terms of leading the way in consolidation and adopting a global mindset and business strategy. It is our aim to become the world's most admired steel institution, to become a benchmark for the industry, and to demonstrate excellence across every aspect of our business operations. This includes focusing on human resources, the environment, health and safety and community support, and we are now in the process of implementing updated policies for each of these areas.
We also continue to remain focused on maintaining high standards of Corporate Governance. The Dutch Corporate Governance code (the "Tabaksblat Code") came into force on January 1, 2004. Since our Governance model was already based on the rigorous corporate governance requirements in the United States, we did not have significant problems complying with these requirements and where necessary took shareholders approval. With respect to all aspects of Corporate Governance, the Company is committed to follow the best international practises both in letter and spirit.
We have recently announced a number of changes to the Board. I would like to take this opportunity to welcome Wilbur Ross, Lewis Kaden and Vanisha Mittal Bhatia to the Board. I have no doubt their experience and knowledge will be a valuable addition to the Company. I would also like to extend my sincere gratitude to both Fernando Ruiz and Malay Mukherjee who are stepping down from the Board. Both will continue to play very important roles in the Company, Malay Mukherjee in the crucial position of Chief Operating Officer of Mittal Steel, and Fernando Ruiz as a board member in the new Mittal Steel USA.
There have also been a number of changes at the senior management level. Most notably Aditya Mittal has been appointed President & CFO, reflecting his significant role in the growth of the company.
Finally, I would like to extend my appreciation to all our stakeholders who have supported us over the years. Specifically I would like to thank our independent Board Members for their support and guidance, both on the Board, and as members of various committees. The past twelve months have been the most exciting period in the Company's history, and the new Mittal Steel is well positioned to take advantage of current market dynamics and set new standards of excellence in the steel industry. None of this would have been possible without the support of our employees and I would like to offer my sincere thanks to them for their continued hard work and commitment.
Lakshmi N. Mittal,
Chairman and Chief Executive Officer
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